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Trading Strategies for Active Traders in Futures and Options

Over the years, futures trading and options trading has gained a foothold among Indian traders. Derivatives trading is a popular choice now, and you can trade with the best strategies to make good gains. Although you cannot bank on tips and strategies alone, handy hints can help you to perform well in the F & O segment. It is a well known fact that, when gains are made with futures and options trading, they are substantial. However, first you must have knowledge, and then make use of tips.

Understand Futures and Options

Beginners may find it challenging to grasp the concepts of futures and options at first, but once they do, it's simple enough. Firstly, there are no processes involved, like having to open a demat account, as you would likely have to with trading in stocks. So, what are futures and options? They are both contracts and differ according to the terms that are stipulated in each of them.

In futures trading, a futures contract is an agreement that an investor enters into, in order to purchase or sell an underlying asset (commodities, shares, gold, etc.) by a predetermined date at a specific price. The value of the underlying asset determines the value of the contract - that means the contract derives value from the underlying asset, hence this is called derivatives trading too. The investor, while having a right to buy or sell assets, also has an obligation to do so. Therefore, regardless of price fluctuations, investors must purchase or sell assets on the date of expiry of the contract in question. If you think that this is too binding and wish to go in for an upcoming IPO instead, think again. With futures trading, you only have to spend a percentage of the value of your trade, and not a heavy lump sum amount. 

In futures and options trading, many investors prefer to trade in options, as those are more flexible contracts. In futures and options trading, options contracts are agreements to buy/sell assets too. With options, the prices of assets are fixed beforehand, and investors must buy or sell by predetermined dates, but there is no obligation to do so.  Investors may change their minds, or sell at an earlier date (than the date of contract expiry) if prices rise, or buy earlier, if prices fall. 

Tips for Active Traders

To make your trades successful in futures and options, here are some tips you should consider while indulging in futures trading or options trading: 

  • Stick with Your System - Successful traders, especially in futures trading always have some kind of system in place. You must select trades with background knowledge, and this keeps losses at a minimum. 
  • Avoid Emotion - As with all trading, emotions and sentiments should not enter the trading picture. Banking on logic is a better way to trade. 
  • Protect Yourself - Particularly in terms of futures trading, there is a certain degree of risk. You can stay protected if you use buy or sell stops to mitigate losses to a level that is comfortable. You can also use hedging like buying puts. 
  • Use a Covered Call with Options - If you are willing to sell your shares at a set price in options trading, you should do so at the short strike price. You have to buy an underlying asset like you regularly do, but simultaneously sell a call option on that asset. 
  • Married Put with Options -In this strategy to protect your downside risk when holding assets, you buy an asset and simultaneously buy put options for an equal amount of assets. 

Trading is Not That Hard

With clever tips and trading strategies, futures and options may not be a nemesis afterall. Trading directly in markets may be easy after you open a demat account, or subscribing to an upcoming IPO, but futures and options have proved beneficial to a host of traders. 

Related Articles: Follow these 5 Expert Advices to Get Started with Investing | 4 Investment Mistakes New Stock Market Players Must Avoid at All Cost | 5 Rules Every New Investor Must Know Before Investing |  10 common mistakes made by SIP investors | 4 Smart Must-Follow Investment Tips for Beginners in India

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